Weaker growth in the eurozone, China and a contraction in Russia will drag on
global growth, despite "shot in the arm" from falling oil prices

The IMF said weaker growth would be driven by a further slowdown in the eurozone, China, and a deep contraction in Russia, where the economy is expected to shrink by 3pc this year, from a projection of 0.5pc growth in OctoberPhoto: Reuters

The International Monetary Fund has downgraded its outlook for global growth for the second time in just three months, as it said a “shot in the arm” from tumbling oil prices would not be enough to lift countries out of their economic malaise.

Ahead of the World Economic Forum in Davos, Switzerland, where world leaders gather this week to discuss challenges facing the global economy, the Fund revised down its global growth forecast to 3.5pc this year, from a projection of 3.8pc in October. Growth for 2016 was revised down to 3.7pc, from 4pc.

The IMF said weaker growth would be driven by a further slowdown in the eurozone, China, and a deep contraction in Russia, where the economy is expected to shrink by 3pc this year, from a projection of 0.5pc growth in October. The Fund believes the Russian economy, which has been hit by western sanctions over the crisis in Ukraine, will shrink by 1pc in 2016.

The eurozone is expected to expand by 1.2pc this year and 1.4pc in 2016, representing downgrades of 0.2pc and 0.3pc respectively. The single currency area slipped into deflation in December, as falling energy costs pushed prices down by 0.2pc.

Growth prospects for Germany, France and Italy were all revised down, while Spain received an upgrade. The country is expected to grow by 2pc this year, up from a projection of 1.7pc in October.

Olivier Blanchard, the IMF’s chief economist, said that while the 55pc decline in the oil price since last September would boost global growth by between 0.3pc and 0.7pc in 2015, this would be more than offset by sluggish investment and weak overall growth.

“A shot in the arm is not always enough. On the other side going against it is general weakness of many economies in the world,” he said. “Potential growth, which is the growth we can expect to see over the medium term in the years to come, has been revised down, and this leads firms to invest less, because the future is less bright, and the result is growth is lower.”

The Fund said lower oil prices would help to “alleviate inflation pressure and external vulnerabilities”, helping central banks around the world to keep interest rates lower for longer in order to support growth.

“Today’s IMF forecast shows that Britain is pulling ahead, while the global economy is being downgraded," Chancellor George Osborne said. "There’s confirmation that we grew faster than any other major economy last year, and we’re set to grow faster this year. But there are risks out there in the global economy and it’s a timely reminder that we’ve got to go on working through our long term economic plan if we want to stay ahead.”

America’s resurgence is expected to continue this year, and the Fund expects the world’s biggest economy to grow at rates of above 3pc for the next two years, even as the US Federal Reserve begins to raise interest rates. The IMF believes the US economy will expand by 3.6pc this year and 3.3pc in 2016, from previous projections of 3.1pc and 3pc.

The IMF also expects sub-7pc growth in China in the coming years, with the slowdown in the world’s second largest economy having a knock-on effect on neighbouring countries. Mr Blanchard said that if growth in China slowed by one percentage point, this would translate into a 0.3 percentage point slowdown in the rest of Asia. However, Mr Blanchard described the slowdown as a “good thing”.

“It shows that policymakers in China have decided to reduce some of the dangers that they were facing on housing on shadow banking and are taking the right measures. They are also trying re-orientate growth from investment to consumption. All this is desirable, but it’s leading to a lower growth rate,” he said.